Electronic Arts 3Q Earnings Preview: Weak Console Market Hurt Sales In Slow Holiday Season

Market trends limit EA's profits from current-generation game titles, analysts say.

on January 29 2013 11:30 AM
Electronic Arts Q3 Earnings Preview: Weak Console Market Hurt Sales Through Slow Holiday Season
Video game publisher Electronic Arts is expected to post lower profit in the third quarter due to slowing sales from current-general game properties. Electronic Arts

Video game publisher Electronic Arts Inc. (NASDAQ:EA) is expected to report sharply lower profit in its fiscal third quarter due to slowing sales for many of its popular current-generation console titles.

The Redwood City, Calif.-based company, which reports Wednesday after the market closes, is likely to report earnings of $174.8 million, or 56 cents a share, on revenue of $1.29 billion, according to analysts surveyed by Thomson Reuters. A year earlier, EA reported earnings of $334 million, or 99 cents a share, on revenue of $1.65 billion.

If the video game company's performance is that poor, the report would show a 43 percent decline in earnings and a 22 percent decline in total revenue.

While EA appears to have turned a profit during the quarter that sees holiday sales, its slowing pace could be a bad omen for the current quarter and fiscal year. The company's third-quarter performance is usually expected to tide if over for the entire year.

Analysts cited a weak holiday quarter for the entire video game industry as the primary reason for EA’s diminished sales, combined with the fact that the market for the current generation of gaming consoles has ground to a halt in anticipation for next-geenration hardware from Microsoft Corp. (NASDAQ:MSFT) and Sony Corp. (NYSE:SNE).

“It’s not so much a question of the quality of the titles as much as it is a problem of demand” since the hardware side of the industry is “at the tail end of its life-cycle,” said Arvind Bhatia, an analyst at Sterne Agee in Dallas.

“Big titles are performing less than they were performing before even if the install base is higher,” Bhatia added. “It happens every few years.”

Due to its hardware restrictions, the video game industry periodically goes through cycles of rapid growth or decline as older consoles are phased out and publishers begin developing game properties for new devices. A report from  NPD estimated last month, video game sales across the U.S. fell by 11 percent despite the launches of high-profile titles like Activision’s (NASDAQ:ATVI) “Call of Duty: Black Ops 2” and Microsoft’s “Halo 4.”

But cyclical factors aside, EA still struggled to boost its sales in the holiday season because weak titles underperformed both commercially and critically. Its popular “NBA Live 13,” which was originally expected to be released for holiday sales, was pushed back to this year after the company acknowledged it was unable to meet expectations for a high-quality sports game in time for the NBA season.

“Medal of Honor: Warfighter,” EA’s first-person shooter that was intended to rival Activision’s commercial juggernaut “Call of Duty,” meanwhile, received weak reviews (average a 53 percent on Metacritic) and faced a number of controversies for everything from its weapon branding to its use of classified information provided by Navy SEAL Team 6.

“It’s not like they don’t know how to do these first-person shooters,” Bhatia said, citing the success of EA’s popular “Battlefield” franchise. “The overall quality of the title wasn’t that high.”

EA currently has two other promising first-person shooters on the horizon: “Battlefield 4” and an unnamed project in development from Respawn Entertainment, a studio formed by several pivotal figures from the early iterations of the “Call of Duty” franchise. Bhatia therefore suggested that EA will “move away from ‘Medal of Honor’” in the coming year to focus on these promising game properties.

In the short term, however, EA has four main titles due out this quarter – “Dead Space 3,” “Crysis 3,” “Army of Two: Devil's Cartel” and “Sim City.” While all of these titles have received promising early coverage from the gaming press, they are still tethered to current-generation hardware.

“Trends suggest video game consumers are bored with the same-old things and we think highlight how badly a new console cycle is needed,” Bhatia wrote in a research note on Monday. 

Meanwhile, analysts estimate EA will report a full-year profit. Net income is expected to rise to $323.6 million, or $1-01 a share, from $284 million, or 85 cents, a year earlier, on slightly lower revenue of $4.07 billion.

Shares of EA fell 3 cents to $15.01 in Tuesday trading. They've fallen 18 percent in the past 52 weeks.

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